Monday May 26, 2008

The Patent Arms Race

There's quite a bit in the press these days about companies (surprisingly, some very large ones) aggressively investing to expand their IP portfolios by purchasing patents or filing for patents on anything that can be imagined - often without stopping to consider whether the "innovation" has utility and is truly novel and non-obvious. Sun is often approached by companies looking to purchase patents (a reflection of the value of our IP) and at times we do sell patents under the right terms, conditions and circumstances.

To some degree, this topic has a very Cold War feel to it with companies growing patent stockpiles to use if attacked or as a form of "mutual deterrence". But, at some point, a company needs to ask how many patents it really needs. And, that's exactly what we did about three years ago. Up to that time Sun was filing well over 1,000 patent applications per year. But, in 2005, we made the decision to reduce our patent filings to the point that we had about 700 patents issued last year. And this number may decline in the future. While this is still a sizable number for most companies, it is a significant decline for Sun and occurs during a period in which we have more innovation than at any point in Sun's history.

Why the change? Part of the reason is financial. On average, it costs more than $20,000 to obtain a U.S. patent and this figure grows significantly when you file around the world. Also, this amount does not include annual annuities required to keep a patent in effect. Being selective in what you patent can result in significant savings. However, the bigger reason for the change is that our focus has shifted from quantity to quality. To this end, we have completely re-architected the manner in which we determine the innovations we will patent. As part of this process, inventions are reviewed by a panel of the chief technology officers from across our different lines of businesses with input from distinguished engineers and other experienced innovators. We apply a significant amount of scrutiny to determine whether something is truly innovative before we submit it to the PTO. For us, it doesn't make sense to patent everything. Rather, our focus is on patents that represent significant technological innovation. (In this regard, we were happy to see that the Federal Circuit will reconsider the patentability of business methods. )

Aside from our focus on patent quality, there is another reason we are filing fewer patents. It has to do with our business model. Unlike some companies, we don't have a corporate goal for revenue derived from patents (and patent litigation). Instead, we invest in patents to support our customers and the communities in which we participate. This support can be in the form of a defensive response to an attack on a community or in the form of the assurance provided by the patent licensing provisions of the CDDL or GPLv3. In the end, it's about delivering innovation to our customers and communities.

If they succeed, we succeed.

Wednesday Feb 06, 2008

The best offense...is a good defense.

I recently shared dinner with a few other GCs of local technology companies. It was a nice evening in which we were able to relax and share insights (and commiserate) about topics of common interest. During the course of our meal while we were discussing rising legal costs, one of my table mates made a statement that I found somewhat bothersome. He said that when faced with patent "troll" litigation, he knows he is going to pay something to get rid of the lawsuit and so he economizes on the use of defense counsel. After all, the thinking goes, if your intent is to settle a case, why spend money on a strong defense?

His view is completely contrary to how we think about this problem at Sun. It's also symptomatic of the way many companies view this issue as a quarterly "cost of doing business" without considering the long term consequences of settlement both for individual companies and our industry.

Before going further, let me state that we respect the intellectual rights of third parties. When a third party claim has been clear and the terms reasonable, we have entered into licenses. However, those situations are easily distinguished from the cases that make up almost all of our present docket of patent litigation. These lawsuits have usually been filed with no advance notice, by plaintiffs that don't commercialize their patents (i.e. create and sell products) and in venues considered favorable to them. It's also almost always the case that these plaintiffs have done little or no investigation to ascertain whether our products infringe prior to filing their lawsuit.

Let me provide an example. Last year, I described a patent litigation brought against Sun by a company named Exponential Solutions LLC. I use the term "company" in the broadest sense as Exponential Solutions does not appear to make any products or offer any services. It is purely a patent holding company consisting of two individuals: Raymond Ratcliff (inventor) and Frank Benevento (investor and decision maker for Exponential).

Exponential filed its complaint against Sun in the Southern District of Florida. The case alleged that the Sun Grid service infringed two patents: 6,996,548 ("Method and apparatus for providing a reward for the use of a processor in a parallel processing environment") and 7,127,437 ("Method and apparatus for receiving a reward for use of a processor in a parallel processing environment"). These patents describe the use of distributed computing and payment to people for use of their home computers connected to a network.

The first we were aware of this suit was after it had been filed. Several months later, we had our first real communication with Exponential when they proposed that Sun pay them an amount with many, many zeros or a large ongoing royalty on our products and services. We declined. While it would have been easy to make the safe decision and pay a license fee to avoid the cost of litigation, we chose to invest in defending ourselves. Invest not just in showing that we did not infringe - we were confident that we did not - but also in identifying prior art to demonstrate that these patents should be invalidated. Our investment yielded results.

Specifically, we found a great deal of prior art that appeared to anticipate Exponential's patents including, a book co-edited by Exponential's own technical expert. More interestingly, we found evidence that suggested another piece of prior art relating to the SETI@home project had been known by Exponential's attorneys, but not produced to the U.S. Patent and Trademark Office when the application was made. In November 2007, the court allowed us to amend our complaint to include an inequitable conduct claim based on these facts.

We had further success when, in December 2007, the court entered a Markman ruling supporting Sun's view that key claims in the patents should be construed narrowly. We were also successful in getting the Court to order Exponential's expert to testify and produce documents that we believed would support our view that the patents were invalid. The court went even further and ordered that all communications between the expert and plaintiff's attorneys be produced. Perhaps, it was the combination of these events that made Exponential begin to rethink the merits of its case.

As we headed for a February trial date, Exponential's demands got smaller and smaller until, ultimately, they agreed to a dismissal with prejudice - meaning they can't bring the case against Sun again,or against our customers, partners and vendors. And, Sun didn't pay a dime in settlement. In fact, the biggest impediment to a final settlement was not our unwillingness to pay, but rather our demand that terms of the settlement NOT be confidential. Why? Because as much as companies would like to have our legislators solve this problem, we also need to consider what we can do. This includes not only investing in a defense when facing these types of plaintiffs, but also by openly sharing information about these cases.

I encourage other in-house legal departments to do the same.

Monday Oct 29, 2007

The NetApp Litigation (continued)

Today, we filed a second complaint against NetApp for infringement of six additional patents and other related claims. Although it may appear a separate case, it is in reality, part of the same litigation originally brought by NetApp in Eastern Texas to impede the adoption of ZFS. There are many theories as to why NetApp chose this particular venue, but because they sued Sun in that location we were forced to respond there. And, that is what we did last Thursday.

The case we filed today is in the Northern District of California. While we dislike the fact that we are forced to litigate this matter at all, we believe California is a more appropriate forum for any dispute between Sun and NetApp. Why? For starters, our companies are headquartered less than 10 miles apart here in Silicon Valley. All of the key witnesses in this case are located here, as are our attorneys. The same for most of the documentary evidence. And, almost all of the technology in dispute was developed here as well.

So to us, it makes more sense in terms of efficiency and economy, that this case be litigated here. With this in mind, we will be bringing a motion before the court in California asking that the case filed in Texas be consolidated with the case filed by Sun today for trial here in the Bay Area. Bottom line, this move would be in the best interest of all parties involved...especially our respective shareholders. We hope that NetApp agrees.

Thursday Oct 25, 2007

The NetApp Litigation

The shift from “proprietary” to “open” business models continues to accelerate. Nowhere is this more apparent than with software. Sun went through this transition several years ago. It was a difficult undertaking (a serious understatement). However, we saw the direction of the industry and committed the company to the transformation. It's probably one of the most important and positive decisions we've ever made. Unfortunately, for some companies this same course remains unthinkable.

Last month, Network Appliance (NetApp) sued Sun alleging that Sun's ZFS technology infringed NetApp patents. Today we filed our response. A PDF copy can be found here.

We had no notice of NetApp's intent to bring this litigation and found it strange that they chose this course so unexpectedly. We were also surprised by NetApp's attempt to impede the adoption of ZFS. Obviously, they have business reasons why they believe they need to so so; however, ZFS was announced over three years ago. It has been in the open source community since November, 2005. So, why now?

We invest an enormous amount of money on innovation – on average 15% of revenue. As part of this, we also invest in various intellectual property protections for this innovation, including patents, copyrights and trademarks. This investment allows us the flexibility to protect ourselves and others. In this case, we intend to use our very broad and extensive patent portfolio to protect the open source community that has embraced ZFS and made it so successful.

I've previously shared my perspective on litigation. The points I made then apply equally to this case, including that a non-judicial resolution is always preferable. To this end, previous to filing our response, I spoke to my counterpart at NetApp. We had a very polite and engaged discussion about what lay ahead for both companies. However, in the end, we were not able to see a path to resolution.

We have reviewed the NetApp claims against ZFS and we believe them to be without merit. (To those of you who have already been sending us prior art - “thank you”. To those of you who would like to lend your support, please go here.)

In our response we address not only the case brought by NetApp, but we have also brought our own claims against the entirety of their product line and are seeking both damages and injunctive relief. It's a responsive action we take not because we want to, but rather because we are forced to. That said, we would like to use this litigation not only to protect, but to promote innovation as well. To this end, we have announced that we will be donating a portion of whatever Sun recovers to organizations supporting the open source community.

It is disappointing that we have to turn to litigation. But, it's clear that NetApp views the open source world much differently than Sun. We've made the transition – they can't contemplate it.

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